The Preferences of the Euro Area Monetary Policymaker

The aim of this paper is to uncover the aggregate monetary policy preferences in the Euro Area. This is pursued under the assumption of optimising policy behaviour subject to a simple model of the macroeconomic structure, following a procedure recently proposed in the literature, in which GMM estimation stems from the optimal control solution to the optimisation problem. Instead of waiting for more quarterly data of ECB policymaking, the sample goes as far back as possible into the pre-EMU years. Through a combined analysis of facts, data and literature on European integration, 1995 is identified as the beginning date of a Euro Area notional policy regime, later sustained by the ECB. The policy preferences are estimated as a loss function with strict inflation targeting at 1.6% and interest rate smoothing, during 1995-2002.